12 Terms You Should Know Before Start Studying Accounts, In order to understand the subject matter clearly, you must understand the following commonly used expressions always used in connection with business accounting. in this article we provide complete details for how to start study accounts subject means we provide details for commonly used terms in accounts. If you can understand these terms then you may face accounts subject very easily. Now you can scroll down below and check more details for “12 Terms You Should Know Before Start Studying Accounts”
12 Terms You Should Know Before Start Studying Accounts
(i) Transaction: It means an event or a business activity that involves the exchange of money or money’s worth between parties. The event can be measured in terms of money which changes the financial position of a person. The transaction could be a cash transaction or a credit transaction.
(ii) Profit: The excess of Revenue Income over expense is called profit. It could be calculated for each transaction or for business as a whole.
(iii) Loss: The excess of expense over income is called loss. It could be calculated for each transaction or for the business as a whole.
(iv) Asset: An asset is a resource owned by the business with the purpose of using it for generating future profits. Assets can be tangible or intangible. Tangible Assets are the Capital assets that have some physical existence e.g. Plant and Machinery, etc. The capital assets that have no physical existence and whose value is limited by the rights and anticipated benefits that possession confers upon the owners are known as intangible Assets e.g. Goodwill, Patents, etc.
Assets can also be classified into Current Assets and Non-Current Assets.
Current Assets – An asset shall be classified as Current when it satisfies any of the following:
- (a) It is expected to be realized in, or is intended for sale or consumption in the Company’s normal Operating Cycle,
- (b) It is held primarily for the purpose of being traded,
- (c) It is due to be realized within 12 months after the Reporting Date, or
- (d) It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a Liability for at least 12 months after the Reporting Date.
Non-Current Assets – All other Assets shall be classified as Non-Current Assets. e.g. Machinery held for the long term etc.
(v) Liability: It is an obligation of a financial nature to be settled at a future date. It represents the amount of money that the business owes to the other parties. Depending upon the period of holding, these obligations could be further classified into long-term or non-current liabilities and short-term or current liabilities.
(vi) Working Capital: Working capital is the excess of current assets over current liabilities.
Working Capital (Net) = Current Assets – Currents Liabilities.
(vii) Contingent Liability: It represents a potential obligation that could be created depending on the outcome of an event. Contingent liability is not recorded in books of account, but disclosed by way of a note to the financial statements.
(viii) Capital: It is the amount invested in the business by its owners. For corporate bodies, capital is normally represented as share capital.
(ix) Drawings: They represent an amount of cash, goods, or any other assets that the owner withdraws from the business for his or her personal use.
(x) Net worth: It represents the excess of total assets over total liabilities of the business. Technically, this amount is available to be distributed to owners in the event of closure of the business after payment of all liabilities.
(xi) Debtor: The sum total or aggregate of the amounts that the customer owes to the business for purchasing goods on credit or services rendered or in respect of other contractual obligations, is known as Sundry Debtors.
These debtors may again be classified as under:
(i) Good debts: The debts which are sure to be realized are called good debts.
(ii) Doubtful Debts: The debts which may or may not be realized are called doubtful debts.
(iii) Bad debts: The debts which cannot be realized at all are called bad debts.
It must be remembered that while ascertaining the debtor’s balance at the end of the period certain adjustments may have to be made e.g. Bad Debts, Discount Allowed, Returns Inwards, etc.
(xii) Creditor: A creditor is a person to whom the business owes money or money’s worth. Creditors are generally classified as Current Liabilities.
